Investment Highlights

• We maintain HOLD on Hartalega Holdings (Hartalega) with a lower fair value (FV) of RM1.40/share (from RM1.59/share previously), which incorporates a 3% premium to reflect our unchanged ESG rating of 4 stars. Our valuation basis remains on a FY24F PE of 26x, at parity to its 10-year average.

• Hartalega’s 9MFY23 core net profit of RM107mil came in below expectations. Even though accounting for 94% of our earlier FY23F net profit and 68% of consensus, we expect the group to report additional losses in 4QFY23 due to lower average selling price (ASP) on a QoQ basis, as indicated during an analyst briefing yesterday.

• While maintaining FY25F earnings, we cut net profit forecasts by 35% for FY23F and 12% for FY24F mainly from lower plant utilisation rate (PU) assumptions of 55%-70% (from 65%-75% previously), given the lower-than-expected PU in 3QFY23.

• No interim dividend has been declared in this quarter with Hartalega guiding that any potential dividend will be announced at the end of FY23F. This remains in line with our assumption of 1 sen/share in FY23F.

• Hartalega registered a 3QFY23 core loss of RM34mil, primarily attributable to a 21% QoQ drop in revenue. The weaker revenue mostly stemmed from a significant QoQ decline of 9% in ASP and 5% in sales volume. The loss was exacerbated by rising operating expenses mainly from natural gas (+25%).

• Hartalega’s 3QFY23 blended ASP was US$21.8-23.8/1K pcs, above the guidance of US$20/1K pcs by Hartalega in Nov 2022 briefing. The variance was mostly related to a more favourable product mix and a higher contribution from the distribution of the group’s own-brand specialty rubber gloves.

• Nevertheless, Hartalega guided that the ASP might fall by 8%- 16% to $20/1K pcs in 4QFY23F, given the continuing supplydemand imbalance.

• In terms of PU, Hartalega was running at 42% in 3QFY23 (vs 49% in 2QFY23) due to the intense market competition and excess global capacity. On a positive note, the group indicated that PU will improve in 4QFY23F, but we believe any improvement may be insufficient to warrant the onset of a stock replenishment cycle in the near term, given order volatility on a MoM basis.

• Notably, the 4QFY23F guidance for higher PU includes lower ASP. We believe that Hartalega may emulate Top Glove by focusing on increasing the PU rather than raising prices. Hence, we reckon that this would result in stiff price competition as other glove makers in Malaysia try to maintain market share amid current weak demand.

• Separately, Hartalega opined that the replenishment cycle could happen after 1QCY23F. This is later than the group’s previous guidance by 1QCY23F. In addition, the quantum of PU improvement due to the replenishment is unclear at this juncture given current excess capacity in the industry.

• The stock currently trades at a FY24F PE of 31x, which is 19% above its 10-year average of 26x. We believe this is unjustified given the unabated challenges of an oversupplied sector globally, which could translate to persistent losses over the coming quarters.

Source: AmInvest Research - 8 Feb 2023